Wells Fargo faces questions on investment banking growth

Wells Fargo’s top executives on Tuesday played down the lender’s gains in investment banking amid questions about the potential risks that come with pushing more into Wall Street-style businesses.

The San Francisco-based bank has been increasing its market share in investment banking, a business it entered through its 2008 purchase of Charlotte’s Wachovia. In a deal announced Friday, Wells Fargo acted as adviser on General Electric’s sale of billions of dollars in real estate assets. The bank is also one of the purchasers of the assets.

Wells Fargo’s growth in investment banking is a departure from its traditional focus on bread-and-butter banking. But in a conference call with analysts Tuesday CEO John Stumpf said its investment banking expansion comes from increased business with longtime customers.

“When you are the No. 1 middle-market bank ... and you do business with 80-plus or 90 percent of the Fortune 500, you’re going to get opportunities to serve customers deeply and broadly,” Stumpf said.

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Stumpf spoke with analysts Tuesday after the bank said first-quarter profits fell 2 percent from a year ago to $5.8 billion. It was the first time the bank, which employs about 23,000 in Charlotte, reported a year-over-year decline in quarterly profit in more than four years.

The drop in earnings came despite revenue increasing 3 percent to $21.3 billion as the lender made more loans and boosted deposits. The revenue gains were offset by higher expenses for salaries, commissions, incentives and employee benefits compared with a year ago.

Although investment banking revenue has been climbing at Wells Fargo, it remains a small slice of the total. In the first quarter, the bank’s $445 million in investment banking fees represented 4 percent of total fee revenue, up from 3 percent a year ago.

Investment banking at Wells Fargo is “not imagined to grow in an outsized way from where it is today,” Chief Financial Officer John Shrewsberry, who once ran the business for the bank, told analysts on the conference call.

According to Thomson Reuters data, Wells Fargo ranked 14th worldwide in advising companies on mergers and acquisitions in the first quarter, up from 40th a year ago. But the bank only had 4 percent market share, compared with 40 percent for Goldman Sachs, the biggest deal maker.

The bank also posted gains in the issuing of bonds and stocks for corporate clients, according to Thomson Reuters.

Charlotte is home to the largest number of investment banking employees for Wells Fargo, which has trading floors in uptown’s Duke Energy Center. New York and San Francisco are the bank’s other major hubs for investment banking.

Investment banking gives Wells Fargo another way to expand revenues at a time when banks are struggling to boost profitability in an era of low interest rates, said Dan Werner, a bank analyst for Morningstar.

“The one area it seems Wells is looking at is investment banking, primarily on the underwriting side,” said Werner, referring to the issuing of stocks and bonds.

Risks associated with investment banking can vary, based on what part of the business a bank is involved in, he said. Advising companies on mergers and acquisitions is not as risky as trading bonds and other securities on behalf of clients, he said.

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Rising expenses

Expenses rose as Wells Fargo’s total employees increased by about 700 from a year ago to 266,000. Shrewsberry said one area of hiring has been compliance. Nationwide, banks have been increasing such staff as they face more regulations in the wake of the financial crisis.

Even with its lower profit, Wells Fargo’s earnings of $1.04 a share beat Wall Street’s consensus estimate of 98 cents. It earned $1.05 a year ago.

Stumpf said Tuesday that Wells Fargo’s roughly 90 business lines are benefiting from continued strength in the U.S. economy.

As the nation’s biggest mortgage lender, Wells Fargo is seen as a bellwether for the U.S. housing market. On Tuesday, the bank said it made $49 billion in home loans in the first quarter, up 36 percent from a year ago. That was an improvement from recent declines.

Stumpf said he’s hopeful about the spring homebuying season, pointing to “wage increases and increases in employment.”